Posts Tagged ‘natural gas’

Avoid the “contango” of commodity ETFs, as it can lower returns – Market Realist

Wednesday, February 27th, 2013

According to Market Realist’s commodities analyst:

Commodity ETFs like USO and UNG often do not track the performance of the underlying indices due to contango, or the market state where the price of an energy futures contract trades above the expect spot price at maturity. Since commodity ETFs purchase commodity futures contracts to mimic spot performance, they fall victim to contango as they roll their futures positions from one month to the next.

For example, an investor should be able to see clearly that during West Texas intermediate (WTI) crude oil’s recovery from January 2009 to April 2011, from $35/barrel to $112/barrel (+320%), USO, the United States Oil Fund LP ETF, only rose from $24 to $45 (87.5%).


The worst commodity performer in terms of contango is natural gas, represented by the UNG ETF. The roll cost for UNG can be greater than 8% per year, which can cause steep losses for the retail investor, despite a price appreciation in the underlying commodity. In the graph below, you can see that the value of the ETF has fallen 96.4% in 4 years, while natural gas prices have only fallen about 79%. This has been terrible for investors trying to capture the price movements of natural gas.

Glencore Considering $19.5 Billion Bid for ENRC…

Monday, June 13th, 2011

You thought you had heard the last of Swiss based Glencore, the famed diversified commodities trading firm, with the news of its multi-billion dollar IPO.  Now rumors of a nearly $20 billion takeover?  Looks like Glencore’s management team is taking advantage of its new currency.  According to ENRC’s 3 founders, Alexander Mashkevitch, Patokh Chodiev and Alijan Ibragimov, who control 45% of the company, Glencore’s CEO recent discussed a possible merger.  ENRC, a Kazakhi miner, trades at a 15% discount to its peers, using a trailing P/E multiple, and is down almost 30% this year.

HISTORY OF GLENCORE

Glencore, headquartered in Baar, Switzerland, is the world’s largest commodities trading firm, which a 60% market share in the trading of zinc, and a 3% market share in the trading of crude oil.  The company is also the biggest shipper of coal in the world.  Glencore’s 485 traders own and run the company today.  It was formed by a management buyout of Marc Rich & Co AG in 1974.  Marc Rich, now a billionaire commodities trader at the time was charged with tax evasion and illegal business dealings, fleeing to Iran.  Years later, he was pardoned by President Bill Clinton.

In 1994, after failing to corner the zinc market, the company lost $172 million and nearly went bankrupt, forcing Rich to sell his share in the company back to the firm, which was renamed Glencore.  It was run by Rich’s inner circle, including Willy Strothotte and Ivan Glasenberg.

Over the years, Glencore has also been accused of illegal dealings with rogue states, including the USSR, Iran, and Iraq (under Hussein).  It has a history of breaking UN embargoes to profit from corrupt regimes.

The company owns stakes in Rusal, Chemoil, Xstrata, Minara Resources, PASAR, Evergreen Aluminum, Katanga Mining, Windalco, OAO Russneft, and many other firms.

INITIAL PUBLIC OFFERING

With its initial public offering weeks ago, Glencore was valued at about $60 billion, and raised about $10 billion.  Each of the 485 traders received average payouts of $100 million through the flotation.

I highly recommend reading, “Secret Lives of Marc Rich.”

Consol Purchases Dominion Gas Natty Assets for $3.48 BIllion

Tuesday, March 16th, 2010

Natural gas has been a target for M&A over the past few weeks.  Exxon’s wager on XTO in mid-December was the largest natural gas acquisition over the past two years, valued at $31 billion.  The all stock transaction exposed Exxon to natural gas prices, as many held the view that the commodity was too cheap at the time.  Consol has been the latest company to make that bet, and investors are not happy.  The over supply of natural gas has made investors doubt the investment philosophy behind this transaction, sending Consol’s shares down 9%.

According to Matt Daily of Reuters, “Consol’s shares fell more than 9 percent on news it plans to issue $4 billion in debt and equity to fund the purchase and development of the property.

The deal is the latest sign that energy companies are targeting faster development of natural gas resources as the fuel wins an increasing share of the global energy market.

In December, Exxon Mobil (XOM.N) announced it would buy XTO Energy (XTO.N) for about $30 billion in stock in a bid to expand its natural gas portfolio in North America and the Marcellus Shale.

Consol, one of the nation’s top four coal producers, has been expanding its shipments of coal to Asian steel producers, but remains mainly a shipper of thermal coal to U.S. power companies.

“This clearly makes them a bigger gas player,” said Brett Levy, an analyst at Jefferies & Co. in Connecticut. “I don’t think it changes the mix between coal and gas today, maybe down the line it will.”

Consol said the purchase would boost its proved reserves of gas by more than 50 percent to about 3 trillion cubic feet and double its potential reserves to about 41 trillion cubic feet.

The deal is expected to close on April 30, and is expected to account for as much as 35 percent of Consol’s total revenue.

Consol also owns 83 percent of gas producer CNX Gas (CXG.N), and Chief Executive Officer Brett Harvey said Consol may seek to buy back the publicly traded shares it does not control. That sent shares in CNX up 17 percent to $30.62.

“We have kept our powder dry to do a big deal like this and we have the balance sheet to do that,” Harvey told a conference call.

Still, the Pittsburgh-based company, which listed $7.7 billion in total assets on its balance sheet for year-end 2009, saw its shares fall $4.94 to 49.39 on the New York Stock Exchange.

Shares of Dominion, which put the assets up for sale last year, were up 4 cents at $39.73 on the New York Stock Exchange.

DRILLING TO RAMP UP

Harvey said the company would ramp up drilling activity on the new properties, which together with Consol’s coal properties reunites land that was once owned by John D. Rockefeller’s Standard Oil empire.

The Marcellus Shale, which stretches from West Virginia across Pennsylvania and into New York, is one of the hottest natural gas fields under development, and analysts have said it may contain enough natural gas to supply the United States for a decade.

Still, some communities have protested that the hydraulic fracturing drilling used to tap the shale in the Marcellus has contaminated water supplies with toxic chemicals. Those concerns, as well as worries from other shale regions, have prompted the U.S. Congress to consider regulating the drilling technique.

Under the deal, Consol will acquire 1.46 million oil and gas acres, including 491,000 in the Marcellus, from Dominion along with more than 9,000 wells that are expected to produce more than 41 billion cubic feet equivalent in 2010, the companies said.”

Consol said it plans to have two rigs drilling new wells by the end of the year, five operating next year and 10 operating by 2013. Those rigs cost about $100 million per year.

For Dominion, which owns power utilities in North Carolina and Virginia as well as a liquefied natural gas terminal in Maryland, the sale will increase its regulated utility business to about 70 percent of its operating profits next year from less than 45 percent in 2006.

Dominion expects to receive after-tax proceeds of $2.2 billion to $2.4 billion, which will meet its equity needs for 2010 and 2011, allow it to repurchase common stock and fund the revenue credits to Dominion Virginia Power customers under a rate case settlement agreement.

The sale will reduce its on-going capital expenditures by $200 million per year.

Dominion is being advised in the sale by Barclays Capital Inc. and Baker Botts L.L.P. provided legal advice.

BofA Merrill Lynch acted as lead financial adviser to CONSOL Energy and Wachtell, Lipton, Rosen & Katz and Akin Gump Strauss Hauer & Feld LLP acted as legal counsel. Stifel, Nicolaus & Company, Incorporated acted as financial adviser and provided a fairness opinion.”